In the area of software, go to Applications > Utilities Audio MIDI Setup and check to see what's up with the Built-In audio settings.
Also be aware that startup chime is set to play thru the internal speakers and then when the software is loaded and the Audio MIDI Setup kicks in, it switches the Audio to the output port if something is plugged into the port.
In the area of Hardware, it may just have a stuck micro switch in the Audio Output Port. Try plugging in a set of iPod buds or Headphones and see if you have sound output thru them.
If so, then the micro switch inside the output port may just be gummed up and stuck. To clean and attempt to unstick it, disconnect everything including the power and spray a very very very small shot of Electronic's cleaner into the port and work a jack plug in and out a few times.
Be sure to wait for a few minutes for the electronic's cleaner to fully evaporate before powering up the iMac and then check to see if both the internal speakers and output with buds or headphones is working correctly.
If not then who knows, it could be anything from a damaged audio card to a bad logic board where the jack ports connect onto it.iMac, Mac Mini, iPad, iPods, Mac OS X (10.6.8), (10.8.2), Safari, iTunes, iPhoto
Built in input and output don't show there either. No sound from earphones/line out either.
The working startup chime is convincing me not to give up, because at it's most basic level, the computer knows how to output sound.
Is it booted in Safe Mode? Audio input or output devices are disabled in Safe Mode.
Try starting up without or using a different keyboard in case the Shift Key is stuck on the one he has.
I'd also create and test a new User Account, in case the Account is corrupt or has some bad third party audio software.
It's not in safe mode, and no sound in new accounts.
I think I've possibly found the problem: The idiot messed with some kernel extensions, and the Lion installer apparently carries them over when you reinstall. I removed all the kernel extensions and reinstalling. Hopefully this resinstall will be "clean" enough